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A view of a Xinjiang facility believed to be a re-education camp where mostly Muslim ethnic minorities are detained. The auditing demands of Washington’s new Xinjiang ‘forced labour’ law have raised questions about Chinese firms’ ability to meet the requirements. Photo: AFP

Xinjiang ‘forced labour’ law leaves Chinese companies in a bind, with doubts over supply chain audits

  • Calls are growing for Beijing to allow independent supply chain audits to meet the requirements a new US law on ‘forced labour’ in Xinjiang
  • US importers cannot gather evidence alone, so the burden of proof has been passed to Chinese companies, who face ‘very high requirements’

Foreign business groups are appealing to the Chinese government to allow third-party audits in Xinjiang to ensure compliance with an onerous new US law on forced labour.

The European Union Chamber of Commerce in China said the demands were so high that “reliable practices for independent, third-party audits” should be established and permitted by the government.

“While European companies were already re-evaluating their own activities and compliance practices within the region, they are now carrying out thorough due diligence throughout their entire supply networks,” the chamber said in an email.

“Some European companies have already withdrawn from Xinjiang as they were unable to carry out third-party audits, and more will follow unless this is addressed.”


Electric carmaker Tesla under fire for opening Xinjiang showroom

Electric carmaker Tesla under fire for opening Xinjiang showroom
The Uygur Forced Labour Prevention Act, which came into effect on Tuesday, creates a “rebuttable presumption” that bans US imports of any materials produced in Xinjiang – where China has been accused of committing rights abuses against Uygur Muslims and other minorities – as they are assumed to be at risk of being tainted with forced labour. Beijing has repeatedly denied the allegations.

Companies can appeal if they can provide “clear and convincing” evidence to customs authorities that their supply chains are free of forced labour.

But as US importers cannot provide evidence on their own, the burden of proof has been passed on to Chinese companies.

Meeting the “very high requirements” imposed by US customs will be extremely difficult, said Roy Liu, partner and chair of the Greater China practice at law firm Hughes Hubbard & Reed.

How the US’ Xinjiang labour law leaves millions of tonnes of cotton unsold

“Circumstances like blurry photos, unclear representations, inaccurate data, incomplete interviews can all lead to US customs deeming the audit unreliable,” Liu said during an online seminar on Thursday.

Given political sensitivities around Xinjiang, it is unlikely US Customs would rule that any product from the region does not involve forced labour, he said, as they would have to subsequently submit reports to US Congress and the public.

“We have observed from Washington that some US customs officials have repeatedly stated on various occasions that they do not believe that any credible labour rights audit can be done in China,” he said.

Cai Kaiming, a senior partner at multinational law firm Dentons in Beijing, said the Chinese government might allow some room for independent auditing in Xinjiang, but determining the list of the third-party auditors could need bilateral negotiation.


Xinjiang, China’s top cotton producer

Xinjiang, China’s top cotton producer
More feasible solutions for businesses include providing evidence that the supply chain of a product does not touch Xinjiang, or involve any companies identified by US authorities to be operating Xinjiang or suspected of using Uygur labourers, the lawyer said at the seminar.

This would also require Chinese companies to refine their management and operations to ensure employment, procurement and financial procedures are in line with the evidence they have prepared, Cai said.

US Customs has identified four “high-risk” sectors that will be scrutinised under the act: apparel, cotton, tomatoes and polysilicon – a material crucial to solar panel production.

Even though all products with potential links to Xinjiang are theoretically banned under the act, Liu said law enforcement in the short term is likely to focus on these four industries and companies on Washington’s entity list.
For Chinese businesses, however, providing information on their supply chain to US law enforcement may also risk violating China’s Anti-Foreign Sanctions law and Data Security Law, which came into force last year, Cai said.

“So before providing any evidence, companies actually have to communicate with Chinese regulators,” Cai said.

The solution for companies to minimise losses would be to send shipments that are detained back to China or to a third country before they are officially confiscated by US Customs, lawyers said.

Ma Jianxin, director of Dow Jones Risk and Compliance China, said at the seminar Chinese companies will be facing more challenges in the future as regulatory reviews from the US are increasingly showing multilateral coordination with allies.

“It seems the act is to suppress certain industries in China, but in fact, it is intended to adjust the structure of the US supply chain by means of laws and human rights, forcing the industrial chain of enterprises to transfer,” said Ma.

“So we can’t just focus on the US, but also on US allies. This is very important. The European Union is also introducing laws related to forced labour, and we should also pay attention.”